Prepaid cards do offer users freedom, but not necessarily from various fees
‘No credit check’ appeals to users
WASHINGTON — Consumers are increasingly turning away from traditional bank accounts and credit cards in favor of a different form of plastic: prepaid cards.
Consumers typically buy them from a retailer, load them with money — sometimes from directly deposited paychecks — and use them at checkout counters or to pay bills online. And the cards are advertised with a phrase rarely used by financial institutions since the beginning of the credit crisis: no credit check necessary.
So it’s no wonder that in 2008 consumers loaded $8.7 billion, up from about $4 billion the year before, on prepaid cards that carry Visa, Master- Card, American Express and Discover logos and can be used anywhere, according to Mercator Advisory Group, a research firm that focuses on the payments industry.
Consumer advocates warn that the cards can carry an assortment of fees. Nevertheless, prepaid cards have become popular among those who cannot get traditional bank accounts, many of them immigrants who rely heavily on more expensive check-cashing institutions.
Many college students use them as an introduction to plastic, and industry experts say they expect that practice to increase when a credit card law takes effect in February that will make it difficult for anyone under 21 to obtain a credit card without an adult co-signer.
Increasingly, industry representatives said, prepaid cards are also attracting consumers who are simply fed up with high credit card interest rates and bank overdraft fees or are searching for better money-management tools.
“It’s a stepping stone to getting traditional bank accounts, but what we’ve seen is that prepaid cards have developed increased functionality over time as a substitute,” said Rachel Schneider, innovation director at the Center for Financial Services Innovation.
Megan Niedermeyer, 24, graduated from college in 2007 with thousands of dollars in credit card debt. To help her with her finances, her parents got her a prepaid card, first loading it with $200. She managed to pay off her credit card debt and used the prepaid card to make purchases for things such as gasoline that she previously managed on credit. She no longer uses her credit card.
“The best thing about prepaid cards is you use money you have, as opposed to credit cards where you keep spending and spending,” said Niedermeyer, a Washington resident who works in international finance.
Nevertheless, consumer advocates urge caution because prepaid cards can come with as many or more fees as credit cards and bank accounts.
“A lot of people think it keeps your spending down and is good for budgeting, but you’re getting charged fees every which way you turn,” said Michelle Jun, a staff attorney at Consumers Union.
In an August survey of 18 prepaid cards, Consumers Union found that 17 issuers charged activation fees ranging from $3 for the Walmart Money Card to $99.95 for the Millennium Advantage card.
Fifteen issuers charged monthly fees ranging from $2.95 for the nFinanse card to $9.95 for the Rush Card. All 18 charged fees of $1.50 to $2.50 for ATM withdrawals. Seventeen charged fees of 50 cents to $1 for checking balances at ATMs. Some, such as the Millennium Advantage card and the Espree card, charge for customer service calls. A few also charge inactivity fees.
“The enormous fees along with the variation, the way fees are described, there’s no uniformity here,” Jun said. “Consumers can’t look at one product and another and do a cost comparison.”
Prepaid card issuers argue that credit cards and low-balance bank accounts come with heftier fees. In particular, they point to overdraft fees, which many banks charge customers if they spend more than they have in their accounts. Those average $35.
Congress is considering legislation that would force banks to get customers’ permission before letting them overdraw their accounts. Many large banks such as J. P. Morgan Chase and Bank of America recently announced that they would do so voluntarily.
“Compare (prepaid card fees) with what kind of fees (people) would pay if they didn’t have a bank and had to go to check cashing, and what kind of fees you would have if you went to a bank,” said Ram Palaniappan, general manager of the Rush Card. “The bank account is probably the most expensive option for these people.”
The Network Branded Prepaid Card Association countered the Consumers Union report with its own study, which was conducted by Bretton Woods, a research firm focused on financial institutions. Released last week, the study found that consumers with low-balance checking accounts pay $200 to $350 annually in ATM, overdraft and minimum balance fees. Those with prepaid cards linked with direct deposit, such as those that employers use instead of paychecks, pay $108 to $207, and those with general-purpose prepaid cards they buy for themselves pay $215 to $320 annually.
“There’s a lot of pricing that has been high, but as the market matures, pricing gets tighter, and that’s what’s happening now,” said Jerry Welch, chairman and chief executive of nFinanse. That card costs $3 to activate, $2.95 a month for maintenance and $2.95 to reload.
Indeed, the industry started up only about 12 years ago. Dozens of companies and banks entered the market as demand increased. Government use of prepaid cards has also increased with Social Security benefits being offered through them. Some states make welfare payments through prepaid cards. Many companies, such as Walmart, have replaced paper checks with prepaid cards.
Log into MyBuffalo to post a comment
MyBuffalo is the new social network from Buffalo.com. Your MyBuffalo account lets you comment on and rate stories at buffalonews.com. You can also head over to mybuffalo.com to share your blog posts, stories, photos, and videos with the community. Join now or learn more.
Reader comments